?? Maximum is $10,500 a year right now. It increases to $15,000 by 2006. There's a bit more for old folks nearing retirement. Nowhere near $30K.
> Worse yet, given the complicated taxation rules on retirement income,
> economic studies by researchers at the Federal Reserve and National Bureau
> of Economic Research have found that all the tax gains for
> working families are erased when they retire and most even end up paying
MORE
> taxes than they would have if they never participated. But those same
studies show that
> high-income individuals end up with a significantly higher lifetime
> after-tax income because of the 401K tax breaks.
??? How can that (a worker with a pension being worse off because she used the tax break) happen? Got a cite?
> Unfortunately, the 401K problem will only gets worse under
> present law. Last
> year's tax law introduced a new kind of 401K plan, labeled the Roth 401K
> after its original Senate sponsor, which will begin in 2006. The
> innovation
> of the Roth 401K is to tax the original contribution but to exempt all
> future increases in value from taxation, forever. This means that
> upper-income taxpayers will be able to amass vast multi-million dollar
> fortunes that will be immune from taxation for all time.
The difference here is not as great as you imagine. Under Roth treatment there is still a tax. You can't just ignore the requirement of using after-tax dollars in comparing it to a regular IRA/401K. The use of after-tax dollars is equivalent to a tax on the accumulation. Roth looks better in light of the sight of endless tax-free returns. But if you ignore lots of wrinkles and assume the taxpayer's marginal rate is identical when she contributes and withdraws, the impact of a Roth IRA and regular IRA are identical. The determination of whether Roth or not-Roth are more lucrative for a taxpayer is actually pretty complicated.
> The new rules allow owners of these Roth 401K fortunes to not
> only pass them
> on tax-free to children and grandchildren, but allow those
> beneficiaries to
> continue accumulating and spending money from the Roth accounts free of
> income tax. Imagine a Roth 401K owner in twenty years with $1
> million in his
> account at death; he leaves $100,000 to each of ten grandchildren. Under
> the exponential math of compound interest, those grandchildren could each
> enjoy by some estimates as much as $50-100 million of tax-free income over
> their lives from these Roth 401K bequests.
They could get the income, but they couldn't enjoy it, since whatever they spend stops accumulating interest. Unless you count enjoyment as dying rich.
> Not only does this threaten the bankrupting of funding for government
> services in the future, but the 401K system will create a whole privileged
> class of wealthy heirs living in a special tax-free world all their own.
The tax break is regressive in terms of where the benefits go, but its benefits are spread well beyond millionaires. Whether the existence of the benefit means a more regressive distribution of wealth depends on what you think would be done with the money otherwise, in the event of no break.
This break has zero to do with "bankrupting of funding for government."
> Before that day comes, we need to stop the Roth program and end the $330
> billion 401K boondoggle for the wealthy.
Over the violent objections of more than a few trade unions, not incidentally.
One fun problem is the transition. What do you do with all the people who have already taken deductions? Make them cough up the money now? Withdraw from their accounts the accumulated back taxes (plus interest?)? Suppose not. Then what do you say to the young workers who are provided with no such benefit, unlike their older peers? It would be a lot easier to zap the Roth accounts, but there are many fewer of them.
mbs